A Build-To-Rent Opportunity Zone Investment Strategy, With Pinnacle Partners

Build-for-rent properties are newly constructed homes that are purpose-built for renting, and they just may be the next big thing in residential real estate.

Leo Backer, Jill Homan, and Mike Nolan join the show to discuss the launch of their new Build-to-Rent Opportunity Zone Fund in this investor webinar sponsored by Pinnacle Partners and Trilogy Investment Company.

Episode Highlights

  • A brief update on the Opportunity Zones tax policy, and why it still offers huge benefits to investors.
  • Why single-family and townhome rental communities are an increasingly attractive asset class for institutional investors.
  • How build-to-rent (also known as built-for-rent) properties can offer investors the potential of both stable cash flow and long-term appreciation.
  • Why the BTR asset class can work well with the long-term holding period of OZ investments.
  • Plus, details on the three BTR properties in Huntsville AL, Augusta GA, and Decatur GA that Pinnacle Partners and Trilogy Investment Company are partnering on.

Guests: Leo Backer, Jill Homan, and Mike Nolan

About The Opportunity Zones Podcast

Hosted by OpportunityZones.com founder Jimmy Atkinson, The Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in the Opportunity Zones industry.

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Show Transcript

Welcome to today’s webinar, Build to Rent Opportunity Zone Investing Strategy. I’m joined today by three panelists, Leo Backer. is managing partner at Pinnacle Partners. Jill Homan is managing director at Pinnacle Partners, and Jason Joseph, who’s joining us very shortly, is CEO and managing partner at Trilogy Investment Company. In a moment, we’re going to dive into discussion of the build to rent asset class. We’re going to touch on a lot of discussion points, including why we think single family and townhome rental communities are an increasingly attractive asset class for institutional investors. How build to rent properties can offer investors the potential for both stable cash flow and long-term appreciation And why the build to rent asset class can work well with the long-term holding period of opportunity zone investing plus This is the official launch of Pinnacle Partners brand new BTR OZ fund. I’m really pleased that they’re launching it. to myopportunityzones.com audience today on this on this webinar. And we’re going to include details on the three newest build to rent properties in Alabama and Georgia. that Pinnacle Partners and Trilogy Investment Company are partnering on But first, I’ve been asked to discuss the current status of the Opportunity Zones program.

And I just want to start by saying that To paraphrase Mark Twain, the rumors of Opportunity Zone’s demise have been greatly exaggerated in my opinion. OZs are still very much alive and well although the tax incentive is perishable. But as long as you roll over a gain triggered prior to the end of 2026, investors are still able to receive some very powerful tax benefits, including one, a deferral period, which admittedly is getting shorter and shorter now. Two, and more importantly, the elimination of depreciation recapture. And then third, in what I view as the most important. aspect of opportunity zone tax benefits is the elimination of capital gains tax on the OZ investment after achieving a 10-year hold. Leo, I want to turn to you. for a moment here, it feels like there just isn’t quite as much hype and excitement about OZ investing as there might have been Earlier in the program’s history, dating back to 2018, 2019, 2020, when it was brand new and it had the novelty factor working for it, but Why do you believe OZ investing is still compelling for investors?

Yeah, thanks, Jimmy. And good overview to start. You know, when we got into opportunity zones, you know, as you did right before they started, you know, there were really three big levers and benefits. And one was the deferral of paying your tax on your original gain and a step up in basis. And those have expired. The step up in basis has expired, as you know, and the deferral date now is getting shorter and shorter. Now it’s down to just about two years. But when we did the math with Novogradac and our other partners, Novogradac is one of the largest CPA firms dealing with DSTs and historical tax credits. And for us, opportunity zones The real, the largest benefit is taking depreciation without recapture and the no tax on the profit and the investment after holding for 10 years and selling the property.

So I think we did see a little bit of a slowdown in the OZ kind of appetite for investors, let’s call it earlier this year. But we really have seen an uptick because I do think a lot of advisors, wealth advisors, et cetera. are really showing that the biggest benefit is not only diversifying into real estate from selling stock or business, et cetera.

But also it’s the real benefit of holding for 10 years and tax elimination is still really the juicing the returns quite a bit. So that’s why we think there’s more. And I really think there’s kind of FOMO. I think there’s a lot of people that want to get into these investments before the program potentially expires.

Yeah. And like we’re bullish that it’s going to get extended, but we can’t, you know, who knows? So right now, I think folks are really looking at it heavy as far as a diversification model and then for the benefits that I mentioned. Yeah, without an act of Congress, it will expire after the end of 2026. We’ll have some thoughts on potential extension legislation in a minute here. But first, Jill, any additional thoughts on what Leo just said? And, you know, one thing Leo said was the OZ benefit can juice the returns. How much Does that depreciation recapture elimination and The step up in basis to fair market value after a 10-year hold, which essentially eliminates capital gains liability. on the back end of an OZ deal, how much do those two benefits juice the returns? So what we’ve found in in reading through the analysis Novogradac has done and then also looking at our models is those benefits constitute what could be half to three quarters of the return of opportunity zones.

So they constitute the vast majority of the benefit. And what we also find is that investors have an opportunity to earn between 200 to 300 basis point increase in their after tax return. And so it’s just significantly accretive and just this idea of tax-free appreciation is so significant and it’s usually when investors fall out of their seat is when you talk about being able to mark your basis up to fair market value and it’s tax-free appreciation and it constitutes the majority of an investor’s opportunities and benefits. And that’s still available, will be available all the way up until the investors can no longer invest at the end of 2026, subject to a potential OZ. legislation. Right. And for anyone unfamiliar, this program, this Opportunity Zone. tax incentive is the result of a federal policy enacted as part of the 2017 Tax Cuts and Jobs Act. A lot of that Tax Cuts and Jobs Act is set to expire over the next couple of years here. OZs in particular are scheduled to sunset after 2026.

So this is a perishable incentive As I mentioned earlier, there is a piece of legislation pending in Congress that would reform that Opportunity Zone incentive and extend out that sunset date by an additional two years, as we mentioned a couple times now, from 2026 to 2028. I don’t know who wants to chime in here. Maybe Jill again. What can you tell us about this piece of legislation, and how should investors consider it? And how important is a potential OZ extension for someone who makes an investment here in 2024. So investor, in my view, investors should really make investment decision based on what we know today. Which is, you know, the legislations passed um tax accountants, tax attorneys know how to work with the legislation. So as you mentioned, folks are very comfortable in investing, utilizing this tax incentive.

And I would suggest that one shouldn’t make one projections about what Congress may or may not do and really make You know, all we know right now is it’s going to end at the end of 2026. And so we really should make investment decisions based on that. And then if there is an OZ 2.0, then you get into a political conversation of. what does that look like? What does Congress look like? Who is the president? And all those will factor into what does an Opportunity Zones 2.0 look like. And so it’s, you know, if you like the current tax incentive, which That’s the reason I leaned in to utilizing Opportunity Zones is I think this is a once in a generation tax incentive.

So if you have a solid investment opportunity with a well-qualified team. And you have the capital gains, I think the writing’s on the wall to make those investment decisions now before the end of 2026, because we really don’t know what it will look like, even if we do get an OZ 2.0.

And… That’s a good point. So bottom line, don’t pin your hopes to the whims of Congress. Leo, I think you’re about to chime in. Yeah, I mean, what I like to tell people, and I know we’re talking about opportunity zones, which is why we’re here. to start. But then I tell people, if you’ve got capital gains to invest, now let’s talk about the real estate because that’s really what we’re talking about as a real estate investment. So if you want to diversify into real estate, you’ve got to look at the sponsor, you’ve got to look at the underlying real estate, right, that you’re investing in. And is there alignment with your development partner, fund manager, et cetera. So, you know, it really is real estate, real estate, real estate. you happen to have capital gains, there’s these benefits we’re talking about. And the other thing I mentioned to people is what’s different today than maybe four years ago, five years ago. the chances of returning capital to pay your tax In 26 on your 26 tax bill or April 27 is getting harder and harder. So you need to have planning with your advisors and your CPAs to have the ability to pay the tax. You’ll hear from us that we are intending to return some on capital at that point, but you can’t bank on that. So I think it’s really be careful and make sure you don’t get caught with not having funds to pay your tax on your original game.

Great, great, great points there, Leo. I do want to turn our attention to Pinnacle’s OZ Fund 8 and also talk about their new BTR OZ fund. But first, let’s launch our first poll question of the day here. If everybody could just take a moment to respond to this quick poll question, which asks, do you have any actionable capital gains that you’re seeking to invest reinvest before the end of this year. So I’ll give everybody about 30 seconds to answer that and then I’ll share the results there. And as I’m waiting for those results to come in, I’ll kind of tee up Leo and Jill for this next portion of the conversation. Leo and Joe, Pinnacle Partners has been an early mover and an expert really in opportunities on investing over many years. You guys aren’t new to this. You’ve been involved since the very get go. of OZs back six years ago all you do at Pinnacle Partners is opportunity zones. And to date, Pinnacle is raised for 10 different discrete single asset OZ deals. You just closed fund eight You’re now launching this BTR specific build to rent specific Opportunity Zone Fund.

And it’s interesting because i had Jason and Leo, I had the two of you on my podcast last year and you guys discussed this emerging strategy on build trim, but now you’re here a little more than a year later, you’re actually launching a fund that’s dedicated to this product. And we’re going to get discussion to that new fund in a moment. But first, let me end the poll here. and share the results on the screen And it looks like about 29% of you are definitely working with an active gain that you’re seeking to reinvest before year end, which is great.

And then another 20%, not sure. So possibly nearly half of you either have a gain or you’re about to have a gain, which is a pretty good portion of the audience here who who could potentially invest that capital gain into an opportunity zone project or fund like this one Leo, you know, I talked a little bit about Pinnacle’s history in the opportunity zone space and we’ll get into your fund in a minute here. But first, can you tell us a bit about Pinnacle’s track record and the history of of Pinnacle Partners. Yeah, absolutely. So my partner, Jeff Feinstein and I formed Pinnacle Partners just over six years ago before the Opportunity Zone regulations were actually fully baked and approved. So we, Jeff, kind of had read, he read every word of the regulations that came out and came to me with my real estate background and said, we need to do something around this.

You know, we were going to looking at investing in projects ourselves or developing, and we quickly determined that being the capital source for developers you know, in opportunity zones was really our best path to execute. So as you mentioned, we’ve done that now 10 times over the last six years in single assets.

So our very first project was a shovel ready workforce housing project in Seattle to our 10th project, which is a student housing project in Spokane that’s under construction and in lease up right now. What’s different today is Well, first I’ll say about two and a half, three years ago, Jill Homan and I have been collaborating because Jill was in the OZ world since day one as well before us, you know, speaking nationally at conferences and investing and working with developers.

So we were looking for a way for us to get our first 10 projects were in Washington, California. We’re based in Seattle. We’ve got our development partners that really took us to Northern and Southern California. And a lot of our investors were looking for us to not only diversify outside of Washington, California, but also to create a multi-asset fund.

So that’s what we did. We brought John Jill in as a partner. And we had, it wasn’t a blind pool fund because we had one project very quickly in Denver that is now in construction and will be complete in April, but that is in our Opportunity Zone Fund 8. that Jill is a partner in. And we’re pleased to announce we just closed that fund at the end of August with projects in Denver, Nashville, Charlotte, and Phoenix. And our evolution from, you know, think about five, six years ago where the real estate markets were very frothy, low interest rates, very competitive for us to get into joint ventures with our development partners. So for us to execute, we had to go in to buy land with our development partners. go through permits and planning. So several of those projects are under construction right now. where the last call it 12 to 24 months, we’ve been able to really come in later in the shovel ready projects that de-risk our investment because you’re taking the permit and the underwriting of kind of pre-development off the table. And now you’re executing on building the projects and going through lease up.

And that’s how we met the trilogy team. And we’re going to introduce Jason’s partner, Mike Nolan. Jason got stuck at an airport with some fiasco. So Mike will be a good relief pitcher here. Mike’s the CFO of Trilogy. But we met the trilogy team about two years ago as we were kind of working on Fund 8. And they had basically a thesis around build to rent that Mike’s going to talk about, which really mirrored what we were looking at. We were having a very hard time finding projects to pencil, call them that are podium build. that we’re building structured parking, five, six story buildings were getting very hard to pencil. So we were really focused on garden style product. Which is surface parked, five story ish projects. And we’ve done several of those more in workforce affordable housing and in student housing. When we met Trilogy.

We knew nothing about bill to rent. It was a newer asset class. They had built, started their company around build to rent exclusively, which really is an adjunct to the kind of call it the garden style buildings. It just happens to be a horizontal version of garden style. We asked them to look at their land holdings and see what do they happen to have in opportunity zones? What land do they own?

And that’s where we came up with the site in Avondale, Arizona, which is now under construction, and then also in NoDa, which you’ll see soon, right before Mike starts talking on aerial that project, which is in lease up currently, which is 75% leased. So we’ve really evolved. That asset class brought us now to fund, our new BTR OZ fund with Trilogy, which Mike’s going to talk about. But what I’d love Jill to talk about is kind of when Jill came on as a partner. It really elevated our game in our joint venture partnerships where we truly are shoulder to shoulder as a fund manager, but also as a joint venture development partner. You know, we’re not just bringing in equity and then hoping for the best. very involved in underwriting, diligence, lease up, marketing, et cetera. So Jill, I’d love you to take a few minutes and talk about kind of your role with us at Pinnacle on our partnerships, and then we’ll move on to Mike. Great. Thank you, Leo. So my background is about approaching 20 years of institutional real estate investing. I spent a lot of that on the sponsor real estate developer side and working with a regional real estate developer in a joint venture structures with really name brand, doing venture partners, including Prudential, Starwood Capital Group.

And so in this role as a limited partner, I have the opportunity to apply those institutional skills to really help institutionalize our process with our joint venture partners. And so what we do in terms of due diligence and underwriting is We’re evaluating materials and the due diligence that’s done at the site, due diligence associated with the Opportunity Zone tax incentive, as well as, we are very involved in the underwriting.

And I think maybe even more involved than what Mike and Jason want us to be at Trilogy. But we think particularly in today’s capital markets, in volatility interest rates, you know, I’m having live conversations today about you know over the last week, what a few basis points tick up means in terms of financing. And we just need to make sure as an investment partner that weren’t tuned all the way from the dirt all the way to the capital markets and that we’re working hand in glove with our development partner to really help realize the business plan. You know, we’re not we may not be the ones, you know. pushing the dirt and the shovels, but we think it’s working with our development partner on business execution is critically important.

So I just wanted to speak about that high level. I don’t know, Leo, if there’s anything else. Otherwise, I’ll hand it off to Mike. Yeah, I think before we go to Mike, I just want to add just a couple more things because again, is, you know. 10 joint ventures, you know, single assets to our four joint ventures in fund eight. We’ve been doing this a long time with a lot of partnerships and have learned a lot. And we’re very good about, you know, working with our development partners. We would not put together a joint venture if we weren’t able to have major decision rights and this oversight, as Jill mentioned. And these developers, they like Pinnacle coming in because we take on the fund management, we take on the opportunity zone oversight, we use best in class legal and tax experts. So they build, they do what they do, and then we help with our resources, but we also handle all the back office as far as the fund management. you know with over 300 million of equity that we’ve put into these several projects that we’ve done, almost a billion of projects, we’ve learned a lot. And the other thing a lot of developers you know, with real estate leverage is king until it’s not. So it’s very, we’ve learned a lot over the last cycle that, you know, yes, you try to bring in accretive leverage debt to projects, but with opportunity zones, it’s actually, we like the fact of de-levering projects and bringing in more equity. And I think Mike and Trilogy have appreciated that approach.

Even building with no debt in some cases, because you can refinance once you build and stabilize and return more to your investors. So we bring in kind of a little bit more of a conservative approach where they think some of our development partners appreciate. Well said. That’s great. And yeah, great job setting the table for today’s discussion.

Thank you. We’ve heard a lot from me and from Leo and from Jill. And I said you’d hear from Jason Joseph, but we’ve got a pinch hitter, Mike Nolan. At Trilogy Investment Company. So let me, you know, as we transition over to you, Mike, let me fire up Okay.

Yeah. this drone footage from that NoDa project, which is one of the BTR assets in fund eight. This is a townhome development in the NoDa neighborhood of Charlotte, which is already 75% leased up. Let me hit the play button here. And while this plays out, this drone footage, Jason, feel free to point out any features of the property. Tell us what we’re looking at here exactly.

Yeah, absolutely. So you’re looking at a 74 town homes located in the NoDa section of Charlotte. I’m actually in Charlotte today and visiting the property earlier. It was acquired from Pulte, who’s a national home builder, and we were able to buy this project in tranches of five to 10 homes.

So I know what we’re going to talk about BTR later, but what are the big advantages of BTR over traditional multifamily is that you can buy homes in tranches And lease them up as you go versus typical multifamily building, you have to build all 100, 200 units, how many it is, and lease them all at once. So that offers a lot of capital efficiencies when investing in BTR. But this neighborhood is right on the edge of what’s going to be an incredible overall neighborhood called The Pass. You’ll see right next to it a new multifamily buildings going in A little bit farther down the street, you have restaurants.

You have shopping, you have a theater. So this is just going to be a very, very cool neighborhood And really the next two to four years. Right in the city of Yeah. So Mike, maybe before you go into the why kind of BTR and Jimmy, maybe you want to pull up that deck.

We’ve always, you know, at Pinnacle, we’ve always looked at our OZ projects. When you look at the map and you look at our projects, there’s a reason of why we’re investing in certain locations. Typically, they’re either close to transit, right? So our affordable workforce housings or no parking or limited parking, but close to transit. And they’re almost always on the edge of the opportunity zone.

Yeah. You know, we’re not really fudging any rules. We just happen to be kind of on the edge, which are closer to urban centers instead of out in the hinterland, which a lot of build to rent projects are being built out in suburban areas and beyond, because that’s where you can find enough land.

And when we looked at the portfolio in Fund 8 with Trilogy, you know, the NoDa project in Charlotte and in Avondale are very urban locations. Which we love because there is not as much competition in build to rent in those locations. There’s still opportunity zones for a reason. They’re kind of underserved areas or up and coming areas, we like to say, and NoDa is that and same with Avondale, although you look at Avondale, it’s pretty much there already. But the three sites that Mike’s going to talk about high level Of course, yeah. in Decatur, Georgia, Huntsville, and in Augusta are no different. They are closer to urban areas. There’s a reason why these locations, because there were several we looked at in your land holdings, Mike, that we decided not to move ahead on, right? So we’re very careful on which locations to look at.

And to Mike’s point, we really like the fact that you’re not building two, 300 units like you are an apartment building at once. You can build one phase and see how the market goes and then build the second phase. You’ve got flexibility here where you’re not building everything at once and hoping that the market’s there. So we really like this asset class a lot.

So Mike, maybe you can tell us a little bit about how maybe a little bit about your personal background. story on Trilogy and your pivot to BTR over time. And then, and we’ve got a slide in here about the case for the BTR asset class that we can go through as well.

Sure. Thank you, Jimmy. So yeah, my name is Michael Nolan, not Jason Joseph, not quite as good looking as Jason, but I will do my best on this project. So I’m the CFO of Trilogy. And actually, I came from a different industry. work with Jason in real estate prior to this last industry. But when I really heard about BTR, I never really saw the ability to get into like a new asset class which made as much sense to me. PTR, I think there’s a lot of advantages to BTR. I think number one, the US, as you guys have all heard, the headlines, we are in a massive housing shortage. John Burns posted a 2.1 million units today, forecasted to be six to nine million units of housing behind in the US, which are just staggering numbers.

So I think that’s a major reason vcr is able to fill that gap. Number two is the affordability crisis. The affordability crisis really times along with the shifting demographics. So right now in the US, millennials make up the biggest age group in the country. Second to that is baby boomers. Millennials typically lived in apartments, but now they’re in their late 20s or early 30s. They’re starting to get married.

They have a dog, maybe they have a kid, maybe they have two kids. And at this time home tours are more unaffordable than ever. It’s very hard to make the average home price in the US is fourth quarter, 420,000 right now. 3,000, $3,500 mortgage. It’s very hard for a lot of people to buy those. So BTR is really feeling that need of the biggest class in the US being millennials. The other one is baby boomers. We all know baby boomers were the biggest generation for a very long time. They are starting to sell their primary homes, wanting to live somewhere more coastal, wanting to downside, and BPR kind of fills that advantages for them.

I’d also say there’s a lot of advantages to investors. On number one, I mentioned that earlier was the building that when you buy a project, you don’t need to wait until the project’s completed. You can start to loosen up. Another one is in BTR, residents stay much longer than a typical multifamily. The average lease of a multifamily building is about one year. BTR, that’s closer to 3.1 years.

That has a lot of positive ramifications. Number one, a lot lower turnover costs. You don’t need to go out and find new tenants, lower lease operates So a lot of advantages with that. So overall. We’re really bullish on BTR. And excited about this fund we’re working on Pinnacle. Yeah.

Hey, Mike, maybe Jill, you can talk about this, but I like how Jason talks about the difference between SFR when you’ve, you know, we’ve all kind of lived in communities as we were children and there was maybe a rental home in your neighborhood. Everybody knew who the renter was.

But how this is different, right? Yeah, I think that’s another really positive for our residents. And what we’re trying to do at Trilogy along with Pinnacle is really build community. That’s the number one thing we talk about when we’re building these projects, purchasing these projects. It’s really building that community for our residents. And one of the main reasons ways that happens is that I guess you call it that stigma of, and I’m sure everyone’s been on the phone, you live in a neighborhood You have one rental house, it’s usually not kept up quite as well. The grass is a little overgrown. Maybe it hasn’t been painted in a couple of years.

And the renters live there, right? And it’s just kind of a stigma when you live in the one rental on a block versus In BTR, it’s a community of renters. The owners are keeping up the property. So beautiful landscaping Beautiful roofs, beautiful painting. very low maintenance living, which is another big advantage for the residents of living in BTR.

And so we believe that it’s just a big draw that, you know, when we turn 32, you just got married, you had a kid. you’re living in an 800 square foot two bedroom apartment with your wife The baby’s in the other room. I have no storage. So now you need to go somewhere to live. you can’t quite afford a $450,000 house. So you take that interim step. You move into NoDa. You have a garage, you have a small backyard, you have a community area, and you’re with a lot of people very much like you. So it really builds a great sense of community.

Okay. So did you want to go? And by the way, I usually get asked the question, hey, is this deck going to be available? And we are going to put Yes. this deck. And actually, I think it’s a much more comprehensive version of this deck will be available in the Pinnacle Partners data room or investor portal. And we’ll tell you a little bit more about how to access that toward the end of the webinar today. Leo, Jill, and Mike, did you want to go into the fund overview now and talk specifically about the assets inside the fund?

Yeah, let’s do that. And I know, Mike, you know, you talked a little bit about your background, but just to confirm, you know, Trilogy is 100% Yep. firm built around build to rent projects. So they’re doing, they started with kind of only development. Now they’re also buying existing product like we did in NoDa kind of forward purchases. And they’re also now doing lot development work. So they’re 100% focused on this asset class, which is really important to us.

Because we’ve always wanted to invest with developers that are, you know, I don’t think we’re supposed to say best in class, but they’re the best of what they do in their product type. So that’s why we really, again. two projects we’ve already invested in. We see how they work. We see their cadence. We were just in, Jill and I were just in Alpharetta, Georgia, where their headquarters are meeting with their entire team, their asset manager, Gina is awesome. And the whole team has been great to work with, which is why you know we discussed, you know, let’s see, do we do one more asset as a single asset or do we build a fund around it and It was really important for us to have three projects that, as I mentioned before, were shovel ready. You know, we wanted to show investors that we do not have to go through an entitlement permit process for these projects. these three sites, two are owned, one will be owned by the end of the year or in January, but they’re ready to go vertical right away. And they’re located in Decatur, Georgia, Augusta, Georgia, and Huntsville, Alabama. Thank you. I do want to save maybe like 10 minutes or so for some live Q&A. We’ve already got a few questions. coming in. So if we can just spend just a few minutes on each one of these different properties. I’ll turn it back over to you. Great. I’ll We all start it off, then you can hop in with anything on the end of this, so I’ll say a few words and I’ll pass it over to you, Leo, and you can know Jill has been added if you’d like but um I think one really great thing about this portfolio of assets is they’re all very close to our headquarters in Alpharetta. So Decatur is about a 30 minute drive.

It’s about 20 minutes to downtown. It sits right on the east side of Atlanta within the perimeter. This is going to be 45 town ohms. in a very cool developing area. A lot of drivers here, high incomes, especially for opportunity zones A lot of drivers, but really the main driver just being its proximity to Atlantis, downtown Atlanta, the airport And all major parts of Atlanta. So very excited about this one. This is going to be a fantastic a smaller project. Yeah, I’ll just add Decatur, you know, I knew nothing about Decatur. Jill, maybe you did, but when we went to the project, but learning about Decatur, it’s a very high barrier of entry market, very hard to find land. I think they had to assemble several homes to get enough property for this development. So there’s very little competition in BTR. You know, Delta’s got their hub.

Thank you very much. In Atlanta and understand a lot of their employees live in and around this area because of proximity to the freeways. So a lot of people we did diligence with know Decatur and know how much need housing is in this market. So as Mike said, this will be the first one to break ground likely first of the year. Smaller project, but we think it’ll get built and leased very quickly.

You see it? Want to go to the next project, Jimmy? Yeah, next one here in Augusta. Perfect. Great. Yeah, so we call this Bay Vale Townhomes. This is 245 workforce townhome units located right in the city of Augusta. This can be done in two phases. So I think Leo touched on it earlier.

Part of the great optionality of doing BTRs is phase one About 120 units in phase two, about 125 units. Augusta is um you know, everyone knows Augusta from the masters. So this is about 15 minutes from a beautiful golf course. But the real driver here is really two things, healthcare with several hospitals located right around the site and Fort Gordon, which is one of the largest bases across the southeast. One other great thing about Augusta is that it’s certain markets in the southeast have been overbuilt. Augusta is not one of those. So a huge need for this kind of workforce lower cost, lower rent housing in this area. So we can see fantastic In this… Yeah, I’m glad. Go ahead, Jill. Sorry. But this was a deal that you know, being on the East Coast still, I wasn’t familiar with the Augusta market and it’s, you know, it’s one of these sites that we, just so you know, we’ve toured all these sites, we’ve walked all these sites, we’ve been by the comps and And it’s really, I would describe it as like an infill site in a growing community of Augusta that’s very proximate to retail amenities.

And so we were really sold once we got out toward the site and really saw what was there on the ground. And as Mike said, I really like the fact that this is kind of that workforce, more affordable level. We’ve done a lot of workforce housing multifamily projects in our portfolios.

Okay. Which a lot of that is the spirit of the OZs is providing more affordable housing the underserved markets, and I would consider this one of them. So you can build a little bit cheaper, rents are going to be lower. So we like that a lot. So this third project, Huntsville, Alabama. What can you tell us about this one? Yeah, absolutely. So Grant Park, like you said, is located in Huntsville, which is in Alabama. 172 units, Class A, high finishes located within a five to 10 minute drive of the main area of downtown Huntsville. The amazing thing about Huntsville is that it has some of the highest average incomes. of any of the southeastern cities. And I think the average income in this area is about $140,000. That’s because they have all of these kind of major defense companies hiring many, many engineers like Lockheed Barton, GE, Polaris, NASA, et cetera. just a tremendous workforce base. Huntsville is constantly hiring too. So there’s more jobs open, people moving there.

So we believe that this kind of town only product that fits this kind of millennial 32 to 35 year old renter with a family moving on slowly. It’s got a great new job. And so very excited about this project as well. Give me a joke? Thank you. Yeah, and I think this project, it’s interesting. I’ve been involved in investments, two investments, and then this would be third in Huntsville.

And I, you know, I went to Huntsville during COVID to check out the market and All right. You know, I left Washington, D.C. Everybody was messed up you know no commentary on mass but you know i just i landed in high school and Thank you. While probably most of the American economy was shut down, Huntsville was wide open and cruise up. And, you know, the bars were open. I was like well Yeah. So, you know, the economy’s turned on and it didn’t turn off during COVID. And so I think that’s, you know, I think what you’ll see in a reflection of the regional domestic product and the other thing that’s interesting is um with the Redstone Arsenal and also you have the you have the research park there and it’s the second largest research park in the country, second only to the Triangle Research Park. in Raleigh, Durham. And so this is just a massive area that attracts you know, you have the flu was it blue origin so you have the rocket company Yep. We had the defense there. You have all these research companies there. And this just like minutes drive, like minutes drive all of these So it’s just a high quality of living, high wages, and, you know, in great climate. So I was just really blown away and have had several subsequent you know tours of this location and just been impressed with the Huntsville market Two quick points. I know we got to get to questions or should get to questions, Jimmy. Two quick points on Huntsville. One is this site we are purchasing finished lots from the landowner and the land developer.

Which is a great thing because that de-risks a lot of the risk in BTR is in the horizontal work, is the site work, and especially in Huntsville where there’s a lot of rock you’re dealing with. which this landowner has found and it’s costing him more to deliver these to us, but we have a fixed price.

So that’s a huge benefit. We can also build this in two phases if we choose to. And then the last thing I’ll just say about just in general of the markets, really more I’ll say August, or I think I’ll talk about Huntsville, but also Charlotte, where our other project is, in NoDa.

The multifamily landscape, as most of you probably know, is very overbuilt. There’s been a lot of development that’s come up over the last two to three years, more that’s going now, but we think that’s slowed to a halt. If we had a multifamily project in Charlotte today, we probably wouldn’t move ahead.

If there was a multifamily project in Huntsville, we may not move ahead. There’s a lot of supply, but build to rent limited supply, lower supply, less competition. So we’re still, again, we love the markets, but we always watch supply, right? So we’re very careful to not over commit into a market where there’s a lot of other projects under construction.

Great, great overview of those three projects. And before we move into Q&A, I want to Okay. to just spend a minute with you, Leo, just talking about the fund overall. These are the three pipeline projects already identified that are going to be part of this new fund that you’ve just launched, this Build-to-Rent Opportunity Zone Fund. Tell us a little bit about the returns and what is unique about how this fund is structured. Yeah, great, great question. Nice softball we gave you, right, Jimmy? So this is different in that our fund eight model is basically we are LPs. Our fund is a limited partner in each of our projects. So there’s a promote waterfall from the developer to Pinnacle Fund to our investors. So the net returns in our fund eight we still think very good. They’re a lot lower than this because in this fund, we are co-general partners with Trilogy. So you got one level of waterfall, one level of fees. So basically project level returns to net LP returns, as you’ll see here, we’re projecting a net LP return of 16% over a 10-year hold period and over a 2.5x equity multiple.

Which is significantly higher than our single asset projects and our funds when we’re not co-GP. So we think that’s very, very compelling. These again are net of fees and promote and do not include the opportunity zone tax benefits. And I think, Jimmy, you saw in the poll where a lot of folks did not think they’d be realizing gains. I’m actually investing non-gains in several of our projects. We think none of our underwriting you will see from us will show the benefits. We do have a sample benefit of what the lift could look like, but these are all without the opportunity zone benefits.

Yeah, so non-gain dollars can go into an OZ fund. They’re just not able to take advantage of the tax benefits. But if you believe in the underlying deal, the underlying strategy enough, it might still be worth Yep. a look with your investment advisor, of course, advising you along the way, but you don’t necessarily have to have a gain to invest in this type of product, you do need a gain in order to take advantage of the OZ tax benefit. is all we’re trying to say here. So I did want to just present this contact slide through the remainder of the webinar here. If you’re interested in learning more about this, please reach out to Blake Backer. at Pinnacle Partners, and we got Jeff Feinstein’s email address listed there too, but reach out to anybody on the Pinnacle Partners team. Jeff at PinnacleOZ.com or Blake at PinnacleOz. And they’ll help you out. Before we move into our into our Q&A session. We do have quite a few questions, but we’ve got some time left. I did want to launch

Our second poll question here Which is Are you interested in access to the fund data room? So in the data room. you’ll get access to the recording of this webinar. You’ll get the PPM. some market research, diligence materials, and also the full presentation deck If you answer yes to this question, Pinnacle Partners will follow up. And one other caveat that I failed to mention earlier, and I’ll mention now is that this fund is for accredited investors only. You do need to be an accredited investor to take the next step and invest in this fund. If you’re not sure if you’re an accredited investor or not, you’re not sure what that means, please reach out to the Pinnacle Partners team and they’ll help advise you on that. And with that said, I actually do need to stop my screen share so I can see the See the Q&A and I’ll moderate the Q&A here now. I’m going to keep this poll open for about 10 more seconds. And then I’ll stop it. And then for those of you who answer yes. technical partners will reach out and provide you more details there. So we have a lot of yeses. A vast majority of people saying yes to that. So I will end the poll now. So it looks like we’ve got just about everybody who’s going to answer it has answered it. So thank you for that.

Let’s get to the live Q&A here. This one came in from Andrew Mason first, so I’ll get to his question first. Andrew wants to know. He’s got a sizable capital gain. If he invests his $100 million capital gain into an OZ fund and the QOZB, let’s say, is a real estate development project. He wants to know about his cost basis. Is his cost basis 100 million?

And let’s say the project appreciates to 2 billion So the $1.9 billion is tax-free. Does he owe taxes just on that original cost basis amount? How does that work exactly? Do you want me to take a stab at it? Yeah, take a stab at it. Jill. I know you know the answer.

So first, what’s unique about Opportunity Zones is an investment in an OC deal has zero basis and so you get your basis as your parata allocation by putting on the debt. And that’s why these investments, the way they work is they can be capitalized with all equity, they can be capitalized with the construction loan and equity, but then that refinance. you get a tax, or I’m sorry, you get debt finance distribution, you get basis associated with that. but um So, I mean, that’s the way you get basis. It’s a way, you know, that factors into getting depreciation and benefiting from depreciation. But I think I just want to make this point, which is, you know, let’s take a step back. you could have and you could depreciate your investment all the way down to a dollar And you could like sell the investment for you know pick a number 200 million dollars And so the way the legislation is written is you mark the basis up from $1 to $200 million, and all of that is tax-free.

And so I would talk to your accountant, but just know It’s different with an OC investment when you first make an investment how basis works. And that’s why it’s important to get basis associated with debt at the time of refinance. But again, talk to your accountants and they can kind of step you through how the intricacies of basis works. We work with, you know. very, very seasoned accountants. And so we’re also happy to arrange conversations with our accounting and staff. Great answer. Very thorough. Thank you, Jill. Next question comes in from Carrie. Carrie wants to know, are you still looking for development partners to venture with an OZ shovel ready or near shovel ready project. Yeah, we’re always open to looking at opportunities. So I guess the answer is yes. I mean, we’re very focused on this BTROZ fund, which we’re just launching. So this will be our only build to rent partnership right now with Trilogy. But we’re always open to looking at looking at opportunities.

Great. Thank you. And thanks for the question there, Carrie. Matt wants to know, he came in late. He’s just asking if there’s going to be a recording later. Yes, Matt, a recording will be available later. And if you request access to Pinnacle Partners data room, the recording will be in there by tomorrow.

Let’s see, I want to get to this other one here from Teresa, another quick hit here. Is there a minimum OZ investment. Leo, what’s your minimum on this fund? Have you set a minimum? Yeah, 250,000 is our minimum. We do have discretion, but $250,000 is what you’ll see in our PPM.

Good. Another question here from Andrew. He asked that that question before that Jill answered. I want to get to his here. He asked, do you think build to rent is a better long-term trend project as opposed to traditional garden style apartments. I can… And I’ll throw in why. Why do you feel that way if that’s the case?

Do you want to start with that? Goodbye. I can take, yeah, I’ll take that one to start so I mean, I would say yes, but I am a BTR developer. But really, for me, it was what I mentioned earlier about the demographic trends with millennials and baby boomers being the largest generations really the US has ever seen. most garden style multifamily are looking very small apartments. You’re looking at first time renters, early renters, early stage renters, low 20s. But really, I think the demographic trends are pointing towards BTR, which has a little more living space, has a garage, storage, backyard. That is what the biggest populations in the US are looking for today. So I’m a big believer in BTR over guns from multiply.

I don’t know. Yeah, and I’ll add, I agree with that, Mike. And I also think that, you know, again, you know, with garden style, you know, your exit, you’re selling an entire project, right? So you’re basically, you’ve got to believe that the market’s trending your way or got to hold it until the market’s there to sell.

Where in BTR, you do have some flexibility to sell it as a whole community, which is our business plan, as we would sell it to an institutional or private equity investor. that are looking at these asset classes today. It’s a very popular asset class. Or the downside risk is you sell each townhome.

That is an exit, which you can’t do in an apartment building. We really like just the downside risk. but also the upside potential. We had a comment from someone who says they’d love to learn more about the Huntsville site because his multifamily office is based there. So, you know, we request access to that data room or get on the phone with Leo or one of the other members of the Pinnacle Partners team if you’d like to pick their brain more on the Huntsville side. I’m sure they’d be happy to talk with you about that. That was an anonymously submitted question. So whoever that was out there, just feel free to get in touch. There’s two questions about Thank you. exit strategy here. At the end of the day.

Okay. This tax benefits great because there’s no capital gains tax liability at sale, at exit, but it has to have an exit. It has to have a profitable exit right for the the tax benefit to actually kick in so One question asks at exit, would you be selling this to institutional investors or one at a time to potential owner-occupied tenants, just wondering in case there’s a possibility that selling individually may end up with higher returns. And then we got another question from Morgan, kind of similar lines. How flexible are your exit strategies for BTR properties within the OZ program’s requirements? So maybe just talk about your exit strategy a bit in detail, if you could.

Do I take that one personally or you want to take that? Yeah, that’d be great, Mike. Yep. Yeah, I think Leo touched on that earlier, but our exit strategy is absolutely selling to institutional investors at the end of the 10-year hold. Right now, all of the major REITs, apartment buildings, multifamily, et cetera, are buying, having an allocation of BTR right alongside that from an institutional perspective.

There’s very little difference between BTR and multifamily. All the major buyers buy both, they invest in both. So you’re really looking at the same values and cap rates, same valuation that’s what they’re buying. So that’s number one. To Leo’s point earlier, the great thing about BTR is the optionality of action. NoDa is a perfect example, and I won’t get into the numbers, but I think the basis which we build are known as fantastic I think those homes have already grown in charlotte You know, at a number, it’s basically where we’re underwriting our 10-year exit today. So 10 years from now, that’s a great opportunity that maybe those homes are going to be a lot worth a lot more on the for sale market than they are as an institutional buyer would pay for them.

We’re going to have that option. At that time, we’re going to be able to decide which route to go. But I think that’s a very, very real opportunity for a lot of these different projects that we’re building. My pleasure. Yep. No, nothing to add there. Fully agree. I think somebody asked about the OZ compliance, but again, if the business plan is to hold these for 10 years in a day and then look at the market at that time. Obviously, we’ll wait to 10 years, but we’ll see where the market is at that point. If the market isn’t at the level we think it should be, we could either hold for a little bit longer, or we could sell off, as Mike said, as individual units. Okay. Dude, we’ve got about three or four minutes. I’ve got three or four. I just saw a fourth question coming here, a fifth question. We keep getting them. If we don’t get to all your questions, please do reach out to Blake or Jeff at Pinnacle Partners. Just head to PinnacleOZ.com. I posted the link in the chat at the beginning of the presentation and you can get in touch with the Pinnacle team and I’m sure they’d be happy to answer any questions offline and I’ll forward any unanswered questions onto them. Next question, Matt wants to know what type of rents will you be charging and how do those rents compare to local multifamily rents?

Yeah, I can absolutely take that. So obviously a little bit different at each of the properties. Overall, I would say the Augusta property has kind of in the high you know 1800s to low 2000s Decatur is a much more urban, nicer area in Atlanta, especially more in the high, mid to high 2500s.

And Huntsville is going to be right in the middle of those. So when we look at rents, and this is a process that Joe and Leo are intimately involved We’ll look at COPS, we’ll look at BTR comps first. We’ll look at multifamily comps and we’ll look at SFR comps. And obviously we’re awaiting the BTR comps in the area the most.

But if not, these are very similar to to multifamily, except in most cases you’re getting a small yard, you’re getting extra storage, you’re getting a garage And we’re basically copying them out to the same per square foot pricing that you’ve seen multifamily and similarly located areas. Overall, these rents are going to be very, very similar to the multifamily units you’re going to see in the neighborhood, but we think you’re getting a lot more for those same rents.

Okay. You might talk. Yeah. What I was going to add, Jill, is just the the level of property manager kind of experience in this asset class over the last, since we’ve been involved over the last 18 to 24 months has grown tremendously, not only the top institutional quality, but a lot of regional property managers are really focused on this asset class. So they’re bringing a real professional.

Yep. you on lease up of these assets no different than multifamily. So that’s been great. And we’re getting comps real time from each of these property management firms and selecting the best in class in each market. Great. And the other aspect is Mike, do you want to talk about the rent personas that you guys have done? in the past where you really not just look at rents at like in the aggregate, but also like you know rent is paid by a renter and knowing who is going to pay that rent and maybe you could just kind of speak to that a little bit. Yeah, I’d love to. Thanks, Joe. Yeah, so this is something really important that we do on all our communities, but for specifically these three communities. is we build an entire renter persona And really the goal of that is, like I mentioned before, the most important thing for us is building that community. Because the more community we build, the happier our residents are going to be, the more they’re going to be willing to pay, and the longer they’re going to want to stay with us.

So a big part of building that rental persona, and this goes down to just choices we’re going to make about what lighting goes in the kitchen What kind of countertops are you going to have? What amenities are we going to build? All these things is we, based on all the demographic trends in that neighborhood, we actually put a name and a face and a backstory to who we think the residents are going to be.

And that backstory, that person And we’re happy to share it. If you have questions, we’re happy to share as much different personas for each of these deals. But that person helps us really inform A lot of decisions we’re going to make along the way as we’re building these projects.

Good. Well, we are at uh Thank you. 3 p.m. Eastern time. So we’re going to go a little bit over just for a minute. I want to get to these last couple of questions. And then I just posted a link in the chat to reach out to the Pinnacle Partners team on their contact page if we didn’t get your question or if you have any additional follow-ups. But quick one here from Steven asks, can you 1031 into your operating partnership as a non-OZ. I mean, I think that would be very Got it. to do so this is It’s in lieu of a 1031. So if you don’t find a 1031, you’d have to kind of take it away from your administrator for the 1031 and put it into an OZ deal. So we’ve had several investors do that when they aren’t able to designate a 1031. So it’s in lieu of a 1031 exchange.

And again, in a 1031, as you probably know, you’re investing your gain and your basis in that investment. And in an OZ deal, all you’re doing is reinvesting your capital gain. And you don’t have to invest the entire game. It can be a proportion of the gain of whatever you want.

So there’s a lot more benefits, we believe in the OZ space than 1031s if you want to be more of a passive investor. Right. No, great answer there. So it’s kind of a, it’s a 1031 alternative. Another question about the data room here. Were you in the data room? Is there a cash flow projection that’ll show how investing will pay monthly during that 10-year hold?

We will have that. We are finalizing that now. So that will be up, Mike, in the next week or so, correct? Yeah. Yep. Correct. Okay. Are we good if we go just a few more minutes over here or do we need to wrap it up? We’re good. Okay. Well, if anybody has to drop, I know we’re a little bit over time. We won’t hold it against you, but we’ll go a few more minutes, see if we can get at all these questions here.

This one asks, do you ever have potential capital calls if the costs succeed your initial underwriting due to unknown variables? How do you handle that situation? Yeah, so the nice thing of a fund format, unlike single assets, is we do, Jill and I work very hard on creating a fund size that includes not only reserves for each project on the project side, but also for the fund. So we were trying to be very conservative on our loan to cost ratio for each project, but also in our equity and our fund that we’re raising for. A lot of fund managers don’t want to overraise, right? Because you’re paying preferred return on all those dollars. And so we try to be very conservative. And as I mentioned, Decatur, we’re looking at potentially building all cash.

So we like to raise more. There’s not a capital call requirement, and we try to be very conservative on how much capital we put in each project. So never say never, but our fund strategy is not to have a capital call. Good. Glenn asks, can you, we just have two more questions left and then that’s all I see here. Then we’ll cut everybody loose. But Glenn asks, can you talk a little more about how the units can be sold individually as single family homes, such as how does the developer ensure they are zoned? deeded, financeable by the individual and home buyer. Yeah, I can take that one. So it’s actually, it’s fairly straightforward. And there’s really, I guess there’s really two ways that we’re going to own these properties. Some of these properties are going to be a single parcel. kind of like a multifamily building. And then others are going to be individually planted or individually parsoned. So NoDa, for instance, is on individual parcels. The fund is the owner on each parcel and if we were to decide what to sell one. It’s very easy just to do that over to the new buyer and they can finance like any other home. So very simple with individually threshold ones. one parcel where there’s multiple units on the parcel. You can also do that through what’s called a horizontal property regime. or an HDR. So you can add that and that’s basically like a condo concept where you can add an HBR to a single parcel and then sell them individually. That’s something we’d have to go through the municipality if, for instance, Augusta is a single part was actually two parcels. But that’s something you can do afterwards. Most municipalities are very happy to have for sale homes, so it’s much easier to go that way and to go the other way to rent. So it’s actually a really straightforward process to sell individual arms.

Okay, good. And last question. This one’s a bit wordy, so bear with me. I saved it for last, but it’s a question about geospecific supply dynamic when choosing target areas for areas where supply is low relative to demand, I’ve seen subsequent development dampen or diminish preliminary projections for first movers.

What quality is deemed to targeting established, more narrow arbitrage areas where demand is not necessarily simple reflections of supply but rather reflections of quality as compared to existing supply. Who wants to tackle that one? I’ll tackle the end of it because this is, David’s hitting on one of the kind of main BTR pieces that we have is that we are distinguished when we talk about supply and anyone talks about supply, we’re talking about multifamily supply. So we believe BTR is inherently distinguished in terms of quality and really just the advantages for the resident living in a beach or a townhome or a single family home as compared to a multi-family home. Oftentimes, we’re going to have the same amenity package. We’re going to have a pool, clubhouse, everything like that, gym. But you’re also going to have that garage. You’re going to have space for your kids. your dog to run around outside. So we think from a quality perspective, no matter what the supply is in the market, and Leo touched on this as well, BTR is inherently a distinguished from the typical supply that you’re just going to measure. Excellent. Well, that wraps it up for today’s webinar. I’m just sharing that final slide again. Please do reach out to the Pinnacle Partners team with any additional questions.

Or if you’d like to request access to their investor portal and data room to get more materials on the presentation that you have just seen today, or you can visit Pinnaclez.com To learn more. Thanks so much, everybody, for participating today. And thank you to my panelists, Leo, Jill, and not Jason, but Mike. Thank you very much, everybody.